supplier / n. one who furnishes with what is lacking or required, to satisfy a need or demand

This broad description captures the relationship between advertisers and their agencies, where the client requires the provision of creative communication ideas developed for their specific needs and then executed to an agreed plan. Just because this service is customised to the needs of the client does not make the agency a partner.

partner / n. : Law. one associated with another or others as principal or contributor in a business, usu. sharing its risks and profits.

The key point here is they share the risks and the profits. Lets look at some typical remuneration models in the market and determine if they reflect a supplier relationship or partnership.

Media Commissions & Service Fees

A number of clients still use this buyer/seller mode of remuneration, with the client buying media/services and the agency supplying these with the remuneration based on the volume bought, not on the quality of work or outcome.

Retainer and / or Project Fee

These are a derivation of the head hour model, where the resource required is calculated or estimated and the total fee is paid for each service, project or outcome.

Rather than based on expenditure the focus has moved to the client buying human resources and paying the associated costs.

Advantage:
1. The buyer knows the cost up front and is able to budget
2. Guarantees the cash flow for the supplier against a set human resource.
3. Buyers can make informed decisions on whether these services are cost effective and essential.

Weakness:
1. No recognition of the value created in the form of intellectual property or revenue or profit generated by the supplier
2. Difficulties defining the service levels and quality of the personnel required to provide those service levels.
3. Irrespective of doing an outstanding job or a hopeless job, profitability remains the same.

Value Based Remuneration

Value based moves from the resource model to the pricing and ROI model setting a price on the delivery of outputs and a ROI bonus on the outcomes of those outputs.

Rather than based on the level and cost of resources, the focus has moved to the value of the agency outputs to the client and ROI of those outputs.

Advantage:
1. The price is set up front for both the buyer and supplier
2. The expenditure with the agency moves from a cost to an investment
3. The agency can share in increased returns where the outputs they produce contribute to increased revenue or profitability

Weakness:
1. Setting the required output and placing a price or value on that output can be challenging
2. Agencies can be unwilling to have their remuneration linked to measures they believe they have little or no influence over
3. Marketers are unable to budget the bonus or variable component of the agency fee based on results

Performance Based Remuneration (PBR)

PBR is a relatively common way of providing an incentive for the agency and usually takes the form of sacrificing profit margin.

Difficulties:1. Achieving agreement on the measures, especially the hard measures such as sales.
2. Difficulty managing the PBR as a floating component within their budget, with a “use it or lose it” accounting practice.
3. PBR measures that are complex, difficult, time consuming and costly to administer and implement.

Partnership Behaviour

So what does constitute a partnership? Where the agency share in the risks and rewards.
1. 100% of the agency profit at risk based on PBR.
2. Linking all agency profit to the sales success or profitability of the client.
3. Investing time and resources with a major profit or revenue share.
4. Joint venture with agency as the outsourced marketing / advertising department.

Conclusion

Not every client wants a partner. Not every client wants a supplier.

The basis of any remuneration should compensate a supplier for their costs with a reasonable profit or reward the partner for the value they create in the business.

Advertisers and their agencies need to understand the type of relationship they want and develop remuneration models that reflect and sustain that relationship, not just pay lip service to it.

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About Darren Woolley

Darren is considered a thought leader on all aspects of marketing management. A Problem Solver, Negotiator, Founder & Global CEO of TrinityP3 - Marketing Management Consultants, founding member of the Marketing FIRST Forum and Author. He is also a Past-Chair of the Australian Marketing Institute, Ex-Medical Scientist and Ex-Creative Director. And in his spare time he sleeps. Darren's Bio Here Email: darren@trinityp3.com

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